Johannesburg, 31 May 2017 — Global Credit Ratings (“GCR”) has published an updated Global Credit-Linked Note and Repackaging Vehicle Rating Criteria.
GCR has updated its Global Credit-Linked Note (“CLN”) and Repackaging Vehicle (“Repacks”) Rating Criteria (the “Criteria”). The updated Criteria applies to all Credit-Linked and/or Repackaging Vehicle transactions that do not benefit from credit enhancement or other structural enhancements.
The credit quality of one or more of the underlying counterparties (the “Reference Entity or Entities”) is critical within the analysis of CLNs or Repacks. Reliance is placed upon the credit rating of the Reference Entities as the CLNs do not benefit from credit enhancement or other structural enhancements. For Repack programmes or multi name CLNs the lowest rated Reference Entity will drive the rating analysis, as it is considered to contribute the most risk to the structure (‘weak link approach’). In the event the issuing entity of the CLN is considered to be an operating entity (i.e. an entity not regarded as bankruptcy remote), such as a bank, GCR will apply a similar analysis in that a weakest link approach will be applied. In this regard, the lower rating of the bank or the Reference Entity will form the base of the analysis for the rating of the CLN. GCR expects all Reference Entities to have a long-term and short-term credit rating accorded. CLNs are accorded a short term rating, which reflects the short term exposure to default of the Reference Entity and its capacity to meet its financial obligations within a 12 month period. Ideally, whilst these entities should be rated by GCR, GCR does accept ratings from other Credit Rating Agencies. However, in some instances, notching (up or down) may apply where GCR may have a different view on a certain entity.
This Criteria is an update to the version published in May 2016. The Criteria was amended to incorporate the inclusion of risk presenting issuing entities of CLNs. The update of this Criteria will not have an impact on any existing transactions that have been rated under it. Going forward, all new transactions will be rated using this Criteria.
This criteria should be read in conjunction with GCR’s published ‘Global Structured Finance Rating Criteria, updated February 2017’.
The updated Criteria is available at www.globalratings.net.
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|Credit||A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money.|
|Default||A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Obligation||The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Repack||Rearrangement of securities with the intent to be more attractive for investment. Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise credit-enhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Transaction||A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.|